Know your car loan prepayment charges

Be updated with your car loan prepayment charges by reading this article
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Know your car loan prepayment charges
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3 min
12-February-2026

Prepaying a car loan can offer significant financial benefits, such as reducing the overall interest burden and closing the loan sooner. However, it's essential to understand the associated charges and conditions. Being aware of the prepayment criteria and fees helps in making informed decisions, ensuring that the advantages outweigh any potential costs. This guide will provide detailed insights into part prepayment charges and important considerations before pre-closing your car loan.

What is car loan part prepayment charges?

When it comes to repaying your car loan early, part prepayment can be a strategic option. This involves making additional payments towards the loan principal, thereby reducing the outstanding balance and the interest payable over the loan tenure. However, lenders may impose part prepayment charges to compensate for the loss of interest income.

Understanding these charges is crucial for effectively managing your finances. For instance, loans with a seasoning period of up to 24 months may incur a charge of 3% plus GST on the part prepayment amount. Conversely, loans seasoned for over 24 months typically do not attract any part prepayment charges. Knowing these details can help you plan your prepayments better and avoid unnecessary costs. You can explore more about part-payment here.

Part prepayment charges for car loans

Criteria

Details

Eligibility

No minimum seasoning required to initiate part payment.

 

Part prepayment allowed for all customer profiles (Individual, Non-individual, Salaried, Self-employed, etc.).

Part Prepayment Charges

3% plus GST for loans with seasoning up to 24 months.

 

Nil for loans with seasoning above 24 months.

Other Terms & Conditions

Minimum part prepayment amount is equivalent to one EMI.

 

No maximum part prepayment amount.

 

No maximum number of part prepayments.

 

No minimum gaps in part prepayments.

 

Procedure for prepaying your car loan

Check the loan agreement

  • Review the terms and conditions of your car loan agreement to understand prepayment terms.
  • Ensure you are aware of any prepayment penalties or charges, if applicable.
  • Confirm the minimum or maximum amounts you can prepay, as some lenders may impose restrictions.

Gather necessary documents

  • Collect key documents such as your loan account statement, identification proof, and loan agreement.
  • Verify your loan details, including outstanding principal, applicable interest, and tenure.

Contact your lender

  • Reach out to your lender via phone, email, or by visiting a branch to inform them about your intention to prepay.
  • Request information on the exact outstanding amount and any additional charges associated with prepayment.

Choose the prepayment method

  • Decide whether you want to make a full prepayment (pay off the entire loan) or part prepayment (pay a portion of the outstanding amount).
  • Full prepayment will close the loan entirely, while part prepayment reduces the outstanding balance and interest burden.

Make the payment

  • Transfer the prepayment amount through a suitable payment method such as online banking, cheque, or NEFT/RTGS transfer.
  • Ensure that the amount is credited to your loan account by the agreed date.

Get a payment receipt

  • After the payment is made, request a receipt or payment confirmation from your lender for future reference.
  • This serves as proof of prepayment and can be useful if discrepancies arise later.

Request a loan closure/ Amortisation statement

  • If you’ve made a full prepayment, request a loan closure statement that indicates the loan has been fully repaid.
  • In case of part prepayment, ask for a revised amortisation schedule to reflect the new EMIs and tenure.

Update your credit report

  • After the prepayment, monitor your credit report to ensure that your lender updates the loan status accurately.

Tips to minimise car loan prepayment charges

Review the loan agreement

  • Before taking a car loan, carefully review the terms regarding prepayment charges.
  • Some lenders may offer loans with no or reduced prepayment penalties after a certain period, so select a lender with favourable prepayment terms.

Opt for loans with flexible prepayment terms

  • Choose a car loan that allows flexibility in making prepayments, such as no penalty after a certain tenure or low charges for part payments.
  • Some lenders may have special offers for loans that enable prepayment without any charges.

Prepay after the lock-in period

  • Many lenders impose prepayment penalties during the initial phase of the loan tenure, often the first 12 to 24 months.
  • Wait until the lock-in period ends to prepay, as the charges may reduce or become nil after this time.

Negotiate prepayment terms

  • If possible, negotiate prepayment terms with your lender at the time of taking the loan.
  • Lenders may sometimes waive or lower prepayment charges based on your credit profile or banking relationship.

Utilise surplus income for part prepayments

  • Consider making part prepayments instead of a full prepayment to reduce your loan balance progressively.
  • Some lenders allow part prepayments with minimal or no charges, helping you reduce interest costs without facing hefty penalties.

Make prepayments strategically

  • Time your prepayments during periods when the lender offers promotions or discounts on prepayment charges.
  • Keep track of your lender’s offers, especially during festivals or special banking events.

Choose shorter loan tenures

  • Opt for a shorter loan tenure initially to reduce the need for prepayment altogether.
  • This helps you avoid higher interest accumulation over a longer period, making prepayment less necessary.

Use bonus or windfall income

  • Use unexpected income, such as bonuses or tax refunds, to prepay smaller amounts consistently rather than making a large lump-sum payment that could incur higher penalties.

Important points to consider before pre-closing your car loan

Pre-closing your car loan, or fully repaying the outstanding loan amount before the end of the tenure, can provide financial relief and eliminate monthly EMI obligations. However, it is essential to consider several factors before proceeding with pre-closure.

Firstly, review your loan agreement for any pre-closure charges, as these can vary between lenders. Some institutions may impose a fee to compensate for the loss of future interest. Additionally, ensure that you have sufficient funds to cover the lump-sum payment without affecting your financial stability.

Secondly, consider the potential savings on interest. Calculating the total interest saved by pre-closing the loan can help determine if the benefits outweigh the pre-closure charges. Lastly, it's important to confirm any administrative requirements with your lender to ensure a smooth pre-closure process.

To effectively manage your finances and avoid additional costs, planning to pay in advance can be beneficial.

RBI Guidelines: No Prepayment Charges on Floating Rate Loans

  • The Reserve Bank of India (RBI) has issued clear guidelines prohibiting lenders from charging prepayment or foreclosure charges on floating rate loans taken by individual borrowers. This measure aims to enhance borrower protection and promote fair lending practices.
  • These guidelines apply primarily to floating rate term loans, including home loans and personal loans, where the interest rate changes in line with market movements or an external benchmark.
  • By removing prepayment penalties, borrowers are allowed to repay their loans early, either partially or fully, without incurring additional costs. This gives individuals greater financial flexibility and control over their debt.
  • The RBI’s move encourages competition among banks and non-banking financial companies (NBFCs), as borrowers can freely switch lenders to access better interest rates or service terms.
  • The regulation also improves transparency in loan agreements, ensuring that borrowers are not discouraged from early repayment due to hidden or high foreclosure charges.
  • These rules are applicable irrespective of the source of funds used for prepayment, whether from savings, asset sale, or refinancing through another lender.
  • However, the waiver generally does not apply to fixed rate loans or loans taken by non-individual borrowers, such as companies or partnership firms.
  • Overall, the guideline supports responsible borrowing, reduces long-term interest burden, and strengthens trust between lenders and retail borrowers.

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Frequently asked questions

Is it good to prepay a car loan?
Prepaying a car loan can be beneficial as it reduces the overall interest burden and helps you close the loan sooner. However, it's essential to consider any prepayment charges and ensure it fits within your financial plan.

How to remove hypothecation from RC?
To remove hypothecation from your RC (Registration Certificate), obtain a No Objection Certificate (NOC) from your lender. Submit this NOC, along with Form 35, to your local RTO (Regional Transport Office). The RTO will then update your RC, removing the lender's hypothecation.

Where can I get a NOC letter for my car loan?
You can obtain a NOC letter for your car loan from your lender once the loan is fully repaid. Contact your bank or financial institution, request the NOC, and ensure all dues are cleared to facilitate the process.

How many days late can I be on a car loan payment? ref: https://www.jdpower.com/cars/shopping-guides/what-happens-if-my-first-car-loan-payment-is-one-day-late "

If you miss your car loan payments, it is considered a default. This can lead to several consequences:

  • Credit Score Impact: Late payments lower your credit score, making it harder to secure future loans.
  • Car Repossession: Your lender can repossess your vehicle as it serves as collateral for the loan. This can result in additional fees and the repossession being noted on your credit report for seven years.

Due to these severe consequences, it is vital to adhere to your payment schedule to maintain your credit rating and avoid repossession.

How many days late can I be on a car loan payment?

Most lenders allow a short grace period of 3–10 days after the due date for car loan EMIs. Beyond this, late payment fees may apply, and the delay can be reported to credit bureaus. Exact timelines vary by bank or NBFC, so checking the loan agreement is essential.

Are car loan prepayment charges applicable on partial payments?

Yes, car loan prepayment charges may apply on partial payments, depending on the lender’s policy. Some lenders levy charges only after a minimum number of EMIs are paid, while others waive them for floating rate loans. Terms are usually outlined clearly in the loan agreement.

Do NBFCs charge higher car loan prepayment charges than banks?

In general, NBFCs may charge slightly higher car loan prepayment or foreclosure charges compared to banks. This is due to differences in funding costs and risk models. However, charges vary widely, and some NBFCs offer competitive or zero prepayment options to attract borrowers.

Does prepayment reduce EMI or loan tenure?

Prepayment can reduce either the EMI or the loan tenure, based on the borrower’s preference and lender policy. Most borrowers opt for tenure reduction, as it lowers the total interest paid over the loan term. EMI reduction offers short-term relief but saves less interest overall.

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